What Is the Cost of FCPA Compliance? Or What Is the Cost of Non-Compliance?

How do you
measure the cost of poor performance? In the baseball world how do you measure
the cost of the Houston Astros abysmal April and equally poor start in May, which
is projected to lead to a 50-108 season record? One measure is the number of
people who pay to come out to the ballpark. As reported in the May 2nd edition
of the Houston Chronicle,
the Astros home attendance is down 2,640 which translates into a per game
revenue loss of up to $660,000. That works out to a full season loss of revenue
of up to $5,436,000. This, of course, assumes that the drop in attendance is
based directly on poor performance and not other factors such as the drop in
disposable income due to the economy or some other factor. But is this the sole
measure of the Astros loss?

In the Foreign
Corrupt Practices Act (FCPA) world, there can be a more direct relationship of
the costs to a violation or even an investigation. For instance, a former
investigation into a Nigerian bribery case involving bribe payments of up to
$132 million led to fines and disgorgement penalties of more than $1.2 billion. (For a more complete
discussion, see blog posting here.)
These fines and penalties do not include any costs for investigations, legal or
accounting fees, other professional fees or drop in stock value associated with
an investigation.

All of this
brings us to 'Ding Dong Avon Calling'
and the bribery probe of its China operations. As reported by Aruna Viswanatha,
in MainJustice, on April 30 and Ellen Byron, in the Wall Street Journal, on May 1, Avon has reported its costs
for the alleged scandal which has engulfed the company. The investigation has
now expanded from China to four other (unidentified) business units. CEO Andrea
Jung is reported as saying, in an April 30 conference call with investors, "No
conclusions can be drawn at this time," regarding the investigations. However,
what Avon did report is some of its FCPA investigative costs to date,
anticipated FCPA investigative costs, loss of revenue in China and loss in first-quarter
earnings.

The expenses,
both anticipated and occurred to date, and their earnings loss box score is as
follows (to-date):

Investigate Cost, Revenue or Earnings Loss

Investigative Cost (2009)

$35 Million

Investigative Cost (anticipated-2010)

$95 Million

Drop in Q1 Earnings

$74.8 Million

Loss in Revenue from China Operations

$10 Million

Total

$214.8 Million

While the
amount of the alleged bribery, or other corruption, has not yet been reported,
MainJustice reported that the investigation is looking into "travel,
entertainment, and gift expenses". It is difficult to believe that the $$ value
of the bribes are anywhere close to the above mentioned investigation cost,
revenue or earnings loss. The WSJ reported that Avon will overhaul its approach
to sales in China, moving towards a direct selling approach, over the next 18
months. This certainly sounds like Avon is moving away from agents and
distributors, the bane of many other US companies doing business abroad.

The WSJ also
reported that the Avon investigation has expanded into its business practices
in countries "selected to represent" each of its overseas regions. With
slightly less than three-quarters of Avon's overall company revenue coming from
outside the US, it may well be that the Department of Justice (DOJ) will want a
more comprehensive review of the company's business practices worldwide, rather
than simply "selected" business practices in "selected" countries. If I were Avon,
I know I would want to do so, if not for the DOJ, but for my company.

How do you
measure the cost of FCPA compliance? Put another way, can your company afford
not to be FCPA compliant? What will the costs be if there are allegations of
bribery and corruption in your company? Will the investigative costs exceed
$100 million as they may well do in Avon's case? Will your fine, penalty and
any profit disgorgement exceed $550 million as happened with Halliburton or
simply be in the $330-$340 million range as with its former Joint Venture
partners? If you agree to a Corporate Monitor what will be that cost? As
reported by Chris Matthews, in MainJustice on March 18, 2010, US District Judge Ellen
Segal Huvelle raised the following spectre regarding Corporate Monitors during
the Innospec Deferred Prosecution Agreement (DPA) and guilty plea hearing:

It's an
outrage, that people get $50 million to be a
monitor," Huvelle said during a hearing in
Washington, D.C., to approve a guilty plea for Innospec Inc., an international
specialty chemicals company with nearly 1,000 employees. "I'm not comfortable,
frankly, signing off on something that becomes a vehicle for someone to make
lots of money."

This could lead
to an Avon Box Score of costs which could read:

Cost

Amount

Pre-DPA Investigative Costs

$95 million???

Pre-DPA Revenue and Earnings Loss

$84 million???

Penalty and Profit Disgorgement

$100 million???

Monitor Cost

$50 million???

Total

How Many Hundreds of $$$ Millions?

So will the
Astros lose 108 this year or is there something they can do about it. Equally
important, what will be the cost to your company for FCPA (non) compliance and
are you willing to risk it...or are you willing to do something to prevent it.

Visit the FCPA Compliance and Ethics Blog, hosted by Thomas Fox, for more commentary on FCPA compliance,
indemnities and other forms of risk management for a worldwide energy practice,
tax issues faced by multi-national US companies, insurance coverage issues and
protection of trade secrets.

This
publication contains general information only and is based on the experiences
and research of the author. The author is not, by means of this publication,
rendering business, legal advice, or other professional advice or services.
This publication is not a substitute for such legal advice or services, nor
should it be used as a basis for any decision or action that may affect your
business. Before making any decision or taking any action that may affect your
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